“Do you think we are in a bubble again or is this sustainable?”
If we describe a “bubble” as a market that has been artificially induced in an unsustainable way, then we’re not in a bubble.
Let’s divide market conditions into four stages:
1. Frenzy – Prices rising, sustainable.
2. Bubble – Prices rising, unsustainable.
3. Bubble Burst – Prices dropping.
4. Bottom – Buyers gaining confidence.
The Fed’s policy of spending billions to keep mortgage rates low was what renewed confidence with buyers, and caused the market to heat up last year. If they stopped today and rates rose into the 4% to 5% range, we’d still be selling homes – though the price increases would probably flatten out.
Prices are racing skyward, but look at the breakdown of financing used to purchase detached-homes in SD County last month:
We can probably feel confident about not being in a bubble when there are more cash sales than FHA/VA – which are the only loans exotic enough to cause a bubble.
The majority of today’s buyers are long-termers – they plan to stay a while. Because they have to qualify to get the mortgage, and are using healthy down payments in most cases, they have a better chance of making it through any future hard times.
There are two notable lessons from the last downturn:
1. People who are underwater are willing to stick it out.
2. The government will save you (after they save the banks).
It is today’s frenzy that is causing people to throw the “bubble” word around. But as long as we have low inventory, solid credit standards, and buyers buying for the right reasons, then I think this market is sustainable. Higher rates (under 5%) won’t change it much either.
Check back in five years and we’ll see if there is an aging-boomer liquidation that causes some disruption, but I think it will be orderly.